Will Hong Kong developers who stock up on empty flats push the government into a vacancy tax?

It’s common sense that when a government turns to taxation for problem-solving, it becomes a double-edged sword that can save or kill you.

One of the beauties of Hong Kong’s set-up, under the “one country, two systems” formula, is that it practises an independent taxation policy, which is well-known for being simple but must take reference of “the low tax policy previously pursued”, according to the Basic Law, the city’s mini-constitution.

So what does this mean?

Again, it’s double-edged: on the one hand, the government has the flexibility to impose or abolish any type of tax, duty or rates; on the other, it also has to meet public expectations for the city’s simple and relatively low taxation system to be maintained.

Of course, how low is “low”, and how simple is “simple” can always be debatable, and the latest situation is worth reflecting upon.

Chief Executive Carrie Lam Cheng Yuet-ngor last week told lawmakers she was considering the possibility of introducing a vacancy tax on developers who hoard completed flats.

The idea was first raised in March by Financial Secretary Paul Chan Mo-po, who at one stage even vowed he would “have no fear” in waging war on developers who stockpile empty flats – although it was seen at the time as more of a tactic to push for supply than actually meaning business.

There was also the argument that the government should ramp up the supply of affordable subsidised housing instead of relying too much on the private market to ease the severe shortage.

Now, in addition to claiming her administration is studying the feasibility of the new tax, Lam has also revealed that Chan actually consulted her before making public comments.

Does it signal a change or is it only a passing breeze for the city’s developers?

The latest government figures showed that 9,370 newly built flats were left unsold by the end of 2017, a more than 12 per cent jump over the previous year. Developers are believed to be holding up to 40 per cent of vacant flats in the city.

No doubt Lam’s remarks made headlines, though she did not offer any timetable and explained it would require comprehensive study and that feedback from the public must be taken into consideration.

Given the complexity of Hong Kong’s property market and other factors that contribute to the sky-high prices, there are also voices urging the government to tax other owners who leave their flats empty in addition to the hoarding developers. Some have suggested the new tax must be “high enough” to have a deterrent effect.

Military and mainland sites suggested by citizens task force as alternative land sources for Hong Kong

Lam must be fully aware it’s easier said than done, but the interesting question is why she and Chan are both touching on such a highly controversial subject now.

A direct effect is to put developers under more public scrutiny and pressure while showing the government has no hidden agenda. The relationship between the administration and developers in Hong Kong is always a delicate and sensitive issue.

While there is a need for cooperation between the two parties in looking for land and ensuring adequate supply, any suggestion of this sort could easily be seen as possible “collusion” and politicised.

As to whether it was a mere gesture or not, Secretary for Financial Services and the Treasury James Lau provided a hint on Saturday by admitting that given Hong Kong’s simple taxation system, the government must be cautious in introducing any new tax.

So, it’s back to the rule of the game: if Hong Kong’s simple tax regime is to be maintained for the sake of a friendly business environment, which is one of the city’s great merits, developers need to be mindful not to push the government into a corner.